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District Court Grants Engineer’s Motion For Judgment On The Pleadings Based On The Economic Loss Doctrine

In Venturedyne, Ltd. v. Carbonyx Inc., 2016 WL 3402807 (N.D. Ind. June 21, 2016), the Northern District of Indiana (the “District Court”) granted a Motion for Judgment on the Pleadings filed by Plaintiff/Counterclaim Defendant Venturedyne, Ltd. d/b/a Scientific Dust Collectors (“SDC”), an engineer hired by Defendant/Crossclaimant Carbonyx, Inc. (“Carbonyx”), to design and manufacture dust collection systems. 

Prior to litigation, Defendant/Counterclaim Plaintiff United States Steel Corporation (“US Steel”) hired Carbonyx to construct an alloy syntheses plant (the “Plant”).  Carbonyx contracted with SDC to design and manufacture dust collection systems such as baghouses, cyclones and other equipment for the Plant.  US Steel sued SDC to recover alleged losses resulting from SDC’s negligently designed equipment.  US Steel alleged it had to repair, replace and modify the dust collection equipment designed and installed by SDC because the equipment was defective, deficient, and unsuitable for the purposes for which it was designed.  US Steel also alleged it suffered production losses as a result of the defective equipment. 

In its Motion for Judgment on the Pleadings, SDC argued US Steel’s counterclaim was barred by the economic loss doctrine, which precludes tort liability for damage to the product itself or purely economic losses.  SDC argued the only damages were to the dust collection system itself, and the resulting economic losses (i.e. loss of production).  US Steel argued the defects damaged other equipment in the Plant, and the economic loss doctrine was therefore inapplicable under the so-called “other property rule.” The “other property rule” states that damage caused by a defective product to other property is recoverable. 

The District Court rejected US Steel’s argument, noting US Steel purchased the Plant as a single, highly integrated transaction, and did not purchase the dust collection equipment in isolation.  The District Court determined the “other property rule” did not apply because the Plant was essentially one single defective product purchased by US Steel, not a collection of individual components.  Because the entire Plant itself was defective by nature of the defective dust collection system, US Steel might allege it suffered damage to property other than the Plant to avoid the economic loss bar.  Because US Steel failed to allege such damages, the District Court held US Steel’s counterclaim was barred. 

The holding in Venturedyne demonstrates the broad nature of the economic loss doctrine in complex construction cases.  The lack of privity between the owner, US Steel, and the engineer, SDC, coupled with the economic loss doctrine, essentially shielded SDC from liability to US Steel for the defective dust collection equipment designed by SDC.  Although US Steel may have a breach of contract claim against Carbonyx, who then may have an indemnity or breach of contract claim against SDC, liability will be determined based on the requirements and limitations of the contracts.